Bank of England investigating dramatic overnight fall in pound

The Bank of England and other central banks are scrutinising the dramatic dive in the pound on Friday to establish what drove sterling to new 31-year low in a trading incident that has had repercussions across global markets.

The Bank, which had been on alert for the impact of computer trading on markets, said: “We are looking at the causes of the sharp falls overnight.”

Governor Mark Carney has asked the Bank for International Settlements – which represents the world’s central banks – to review the events which took pace in the early hours of Friday morning. “With input from the Bank, the [BIS markets] committee will review the lessons from this, and other recent episodes of flash events in foreign exchange markets at its next meeting,” the Bank said.

At one point the pound dropped 10% from $1.26 to $1.15, its lowest level since March 1985, in a matter of minutes as Asia opened for business. . It regained some of its losses and was down 1.4% at $1.2440 as London closed for the weekend.

While traders continued their postmortems, a strategist at HSBC, David Bloom, said: “The currency is now the de facto official opposition to the government’s policies.

“To us, the foreign exchange market is exhibiting an uncanny resemblance to the five stages of grief. First, following the Brexit vote came the denial – theories circulated whether a second referendum would have to take place. Second was anger – claims the vote was unfair. Third was the bargaining – arguments maybe it wouldn’t be that bad, what if the UK followed the Norwegian or Switzerland model. Now, the fourth – a gloom is prevailing over the pound.

It’s become an uncomfortable reality to the market, post the Conservative conference, that the UK will embark on a ‘hard Brexit’.”

Bloom said he expects the pound to be at $1.10 by the end of 2017.

The fall in sterling helped propel the FTSE 100 44 points higher to 7044. The blue-chip index tends to rise when sterling falls, because most of the constituent companies earn the majority of their money in dollars, rather than pounds.

As the currency rallied, there was speculation that a technical glitch or human error had caused a flurry of computer-driven orders.

Naeem Aslam, the chief market analyst at currency trader Think Markets, said: “What we had was insane – call it flash crash, but the move of this magnitude really tells you how low the currency can really go. Hard Brexit has haunted sterling.”

The Bank of England has previously highlighted the impact of trading algorithms. “Some markets appear to have become more fragile, as evidenced by episodes of short-term volatility and illiquidity over the past couple of years,” Threadneedle Street said last December, warning of a move towards “fast, electronic trading.”

The foreign exchange market is largely unregulated, but central bank policymakers will want to know the reasons for the sudden currency move. One theory is that dealers, or computer trading systems, were reacting to a Financial Times article in which the French president, François Hollande, said Britain would have to “suffer” for the Brexit vote in order to ensure EU unity.

Some algorithms have been designed to feed off news headlines and social media, meaning that the programmes can be affected by human factors.

Hollande’s comments at an EU dinner in Paris came after the British prime minister, Theresa May, hinted that the UK was moving towards a Brexit deal that could restrict its access to the European single market, but provide greater control over immigration levels.

Sean Callow, a senior currency strategist at Australian bank Westpac, noted that sterling had been “on a precipice” since May’s speech at the Conservative party conference.

“I think we’ve underestimated how many people had money positions for a very wishy-washy Brexit, or even none,” he said.

Speaking in Hong Kong on Friday, the Conservative MP Mark Garnier, a minister at the Department for International Trade, said: “Clearly it’s [the falling pound] to do with the [Brexit] vote, but actually it’s not an unwelcome reaction. Sterling is probably about where it should be. We’re just going through a relatively short period of volatility.

“We’ve probably found stability at this level. What we don’t want is to see it jumping around 5% on a weekly basis – nobody wants their currency to be volatile.”

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